Start with the income

Begin with realistic rent for the property as it is today — not after renovations you haven’t done yet. Here in St. John’s, plenty of investors buy a house with a basement apartment, so you may be adding up two rents. Then build in vacancy: the weeks a unit sits empty between tenants. Even in a tight rental market, assuming it’ll be rented 100% of the time is a mistake.

Then subtract every cost

These are the expenses that come out before the mortgage:

  • Property tax — our Property Tax Calculator estimates it for St. John’s, Mount Pearl, Paradise, CBS and Torbay.
  • Water and sewer — billed per unit in most towns here, so a two-unit house pays it twice.
  • Landlord insurance.
  • Maintenance and repairs — set money aside every month, even when nothing’s broken yet.
  • Property management, if you won’t be managing it yourself.
  • Heat and electricity, if they’re included in the rent.

What’s left after these is your net operating income (NOI). Subtract your mortgage payments and you have your cash flow.

The four numbers that matter

  • Cash flow: what’s left each month after every expense and the mortgage. Positive means the property pays for itself.
  • Cap rate: your NOI divided by the purchase price. It measures the property’s return on its own, as if you’d paid cash — handy for comparing one property to another.
  • Cash-on-cash return: your first-year cash flow divided by the cash you put in (down payment, closing costs and any repairs). It shows the return on your money.
  • IRR (internal rate of return): your total yearly return over the time you own the property, counting mortgage paydown, appreciation and the eventual sale. It’s the big-picture number.

A worked example

Here’s an example using the starting assumptions in our Rental Property Calculator: a $380,000 property bought with 25% down ($95,000) at 5.5% over 30 years, bringing in $2,400 a month in rent with 4% vacancy, $3,000 a year in property tax, $1,400 in insurance and $1,900 in maintenance, self-managed, and held for 10 years with 3% appreciation.

  • Monthly cash flow: about $172
  • Cap rate: 5.6%
  • Cash-on-cash return: 2.0%
  • IRR over 10 years: about 12.3%
  • Total profit after selling in year 10: roughly $196,000

Notice what’s happening. The monthly cash flow is modest, but the overall return is strong. Most of the profit comes from your tenants paying down the mortgage and the property growing in value — not from the cheque left over each month.

Test the “what ifs”

Good analysis means stress-testing your assumptions. In that same example:

  • Hire a property manager at 8% of rent, and monthly cash flow drops to about −$12 — the property no longer pays for itself month to month.
  • Assume 10% vacancy instead of 4%, and cash flow falls to about $28 a month.

Neither scenario makes it a bad investment — the 10-year return is still roughly 11% — but they show how thin the margins can be, and why you want a cushion.

Financing a rental

If you’re buying a property purely as an investment, you’ll generally need at least 20% down. But if you’ll live in one unit of a property with up to two units — say, a house with a basement apartment — you may be able to buy with as little as 5% down and let the rent help carry the mortgage. A mortgage professional can tell you how much of the rental income a lender will count when you qualify.

Rules every Newfoundland landlord should know

  • Make sure the apartment is legal. Before you buy, confirm that any basement or secondary unit meets the town’s requirements — bringing an unpermitted unit up to code can be expensive.
  • Know the rules on rent increases. Newfoundland and Labrador doesn’t cap how much rent can rise, but under the Residential Tenancies Act you can only increase it once every 12 months, with at least six months’ written notice for a month-to-month or fixed-term tenancy.
  • Get the right insurance. A standard home policy may not cover a rental unit; you’ll likely need landlord coverage.

Run the numbers before you fall in love

It’s easy to fall for a property and then try to make the numbers fit. Do it the other way around: plug a listing into our Rental Property Calculator before you book a showing, and if it works on paper, let’s go see it. Our team is always happy to help you run the numbers on a property you’re considering.

Source: rent-increase rules from the Government of Newfoundland and Labrador’s Residential Tenancies policy on rental increases. This post is general information, not legal or financial advice.